4. The UK is influential in the EU when it fully engages

Chapter 4

Chapter 4 – The UK is influential in the EU when it fully engages

The benefits to the UK from EU membership have not happened by accident: from big-picture
developments to the nuts and bolts of everyday business decisions, UK influence in the EU is
an integral element of supporting British business ambitions. The UK has historically
influenced right across the legislative process to achieve the outcomes it desires, from the
genesis of the Single Market in 1986 to recent British-led progress in Europe on climate
change. However, there is a danger that UK influence could wane if the UK does not take
steps to maintain it.

The EU policy process is complex and has many actors, with its output having a direct
impact on business competitiveness and its ability to create jobs in sectors and regions
right across the UK. The nature of the EU means that the UK will not always get its way –
being part of a club will inevitably mean compromise occurs – but the UK has a variety of
‘tools of influence’ at its disposal. Not only is it formally one of the most powerful EU
members in terms of its voting strength, it is also highly effective at building alliances
with other member states. British personnel occupy senior positions in the Commission;
British technical expertise informs the detail of policy development from financial services
to broadcasting; and the UK uses its membership of international bodies such as the G20 to
help shape the international context in which the EU operates.

However, UK business is concerned at recent indications that the UK is not maximising its
potential influence on EU outcomes. Domestic action is needed if UK interests are to
continue to be best realised through the European Union. The UK must be consistently and
proactively engaged - throughout EU institutions and Europe’s member state capitals - if it
is to continue to shape the EU to support its global future.

4.1 UK influence has helped maximise the openness of the EU

As shown in Chapter 3, specific policies of the EU have helped increase the openness that
drives productivity improvements and boosts UK trade globally. The UK has used its influence
in Europe to shape the Union to this end to a greater extent than many realise. It drove the
establishment of a Single Market to bring down internal protectionist barriers, pushed an
external posture that is predicated on a free trade agenda, and spearheaded an enlargement
process that widens rather than deepens the EU. The UK has also influenced specific EU
policy outcomes that have helped it lead the world in a number of fields, such as financial
services and climate change technology. British pragmatism and co-operation with European
partners have produced workable solutions at EU level to the big challenges facing all of
Europe’s economies.

"

The UK has used its influence in Europe to shape the
Union to a greater extent than many realise.

The need to continue to influence these policy outcomes becomes even more acute when one
considers the nature of the modern economy in which many British businesses operate. The
challenges business face today – and will continue to face in the future – in a global
economy are increasingly insurmountable through purely national solutions (see Exhibit 42).
Being influential in the EU and the world would be less of a priority if the UK economy
could act in isolation from others. However, as the previous chapters have identified, being
successful in a global world is rarely achieved through independent and unilateral action:
economies and businesses from across the globe are increasingly interconnected, as goods,
services, finance and people – not to mention knowledge and ideas – cross borders ever more
rapidly.

Setting the rules of this game, so that everyone gets the chance to compete fairly,
increasingly requires co-operation and solutions at European and international level. Given
that co-operation often requires negotiation and trade-offs, whether the UK is inside or
outside the EU, exerting influence becomes essential to getting a good deal for British
business.

Exhibit 42: Creating a positive, modern business environment requires co-operation across
borders

Increasing financial stability

The ability to regulate banks’ capital requirements at a national level is limited because
the global nature of the banking industry allows actors and capital to relocate to
less-regulated areas. This risk was in part addressed by the global G20 agreement setting
out common global rules of bank recapitalisation after the financial crisis. As the Governor
of the Bank of England, Mark Carney, has said, building “an open, integrated, resilient
system…requires full, consistent implementation of new standards, better information-sharing
and co-operation to solve cross-border problems”.[1]

Supporting innovation and investment

A company basing its business model on patented innovations might find it difficult and
costly to operate across borders, due to the prohibitive cost and the complexity of
obtaining patent protection in new countries. The EU unitary patent, agreed in December 2012
under the enhanced co-operation procedure, will create a single patent system across the
Single Market (with the exception of in the non-participating Spain and Italy) and will have
a single specialised patent court ensuring the highest review standards. According to the
Commission, this could “radically reduce, by up to 80%, translation and related costs for
obtaining patent protection in the EU”.[2]

Engaging in EU policy is complex and time-consuming – and being part of a club means that
you don’t always get your way

The EU policy process spectrum encompasses everything from totemic shifts in the direction
of the Union – including the creation of the Single Market or eastwards expansion of the EU
– to the day-to-day execution of specific pieces of legislation that can significantly alter
the relative competitiveness or even fundamental business models of UK firms.

The impact on business of a specific piece of legislation is the product of a process in
which policies are, in stages, initiated, discussed, debated and then adopted. Different
actors try to make their voice heard to ultimately ensure the final outcome best realises
their interests and objectives.

The nature of the EU policymaking process itself – and the number of actors involved –
highlights why influence rather than straight ‘hard power’ is important: the process
requires reaching an agreement between 28 member states, over 750 elected Members of the
European Parliament, and the European Commission. No single country can get its way without
support. Such a consensus-based system means that the various actors work to find the space
for a compromise that everyone can approve. Although it is often assumed that it is UK
officials conducting these negotiations on behalf of the UK, the EU process allows for
significant input from the whole spectrum of British society: UK politicians, private
businesses, employer organisations, trade unions and civil society groups can all influence
the process both directly and indirectly.

The number of actors shaping legislation in the policy process – and the fact that they
increasingly interact with each other during the majority of policy processes – means that
the UK has to seek to influence right across the board: in European capitals (to get
agreement in the Council and at senior Commission level), in the directly elected European
Parliament and in the EU civil service (whether the Commission or various agencies).

Engaging in this policy process is time-consuming, for
both business and government, but influencing it is vital
to ensuring that the UK continues to benefit from EU
membership. High-level political forces clearly dictate
many of the EU’s big-picture priorities and over-arching
strategies. The UK must undoubtedly influence the EU at
this level, and indeed EU Summits and Council meetings
are often the focus of headline political messages and
reporting. But business is also focused on those day-today
decisions that create the conditions in which they
have to operate, however unglamorous the nuts and
bolts of policymaking may be. Exerting real influence
on the policy process – to secure the outcomes that
affect businesses on the ground – requires serious and
significant effort at both levels.

Negotiations in Brussels go through many rounds in the attempt to refine solutions so that
they are as satisfactory as possible to the largest number of actors. It is therefore vital
to engage throughout the legislative process to ensure that the ultimate solution fits the
UK’s priorities. To begin with, the pre-legislative phase is important for exercising
influence, especially in the case of novel policy development where getting in early means
that the UK can set the agenda and ensure that the EU focuses on its priorities. For
example, the UK has been a key player in driving the recently launched EU trade and
investment negotiations with the US and Japan. However, given the extensive alterations that
can be made later on in the process – through political horse-trading within and between the
institutions – relying solely on the initial stages of the process is not sufficient for a
rounded influence strategy.

"

The UK is one of the most structurally powerful individual member states.

The policy process is a dynamic competition of ideas and interests that can be influenced
to further one’s own interests; the winners of the game are the ones that consistently
engage over time.[3] The UK
will not always get its way, but it has historically been
influential enough to ensure that overall successes have outweighed occasional setbacks.
Indeed, 72% of British businesses believe that the UK currently has a significant or very
significant influence on EU policies that affect their business.[4]

In finding ways to be influential, the UK has a number of ‘tools of influence’ available to
it that can be used to bend the EU process to its will. Locating the right tools of
influence – formal or informal – and deploying them at the right time towards the
appropriate people is the key to a successful influencing strategy. The UK has effectively
harnessed the tools of influence available to persuade both partners and opponents to
support the UK’s position at key moments in the policymaking process, to the broad benefit
of British business in pursuit of their global ambitions.

4.2 British influence rests on the effective use of a variety of ‘tools of influence’, and
the UK must ensure that the use of these tools is maximised

The UK is one of the most structurally powerful individual member states in a number of EU
institutions. But, while the power of this formal influence has always been important and
undoubtedly underpins effective UK engagement in Europe, the ability to achieve policy
outcomes that best realise Britain’s aims and objectives has often rested on strategic use
of informal influence to augment the formal rights that EU membership gives the UK.

While there is no readily available objective measure of any member state’s informal
influence in the EU[5] – or indeed any overview of the
influence exercised by other actors, such as business representatives or NGOs – analysis of
the deployment of the tools of influence available in terms of outcomes gives a useful
picture as to how much influence a member state has.

Building alliances is the key to maximising the formal influence available to the UK
through voting. This is furthered by the extent to which the UK can place supportive
personnel in key EU institutions, use its credibility in areas of national expertise and
bring pressure from international actors to bear in order to shape legislation that best
realises UK interests and objectives (see Exhibit 43).

Exhibit 43: Tools of influence in the EU policy process

Voting power is the basis of UK influence

The UK is a large member state and has correspondingly large structural power. The UK is
today among the major powers within the Council with the same largest share of weighted
votes (29 or 8%) as Germany, France and Italy. In the European Parliament the UK has 73 of
766 seats[6], around 10% of the total, which is the
third-largest share after Germany and France. This formal influence leaves the UK well
placed to use its voting power to further its aims.

In the Council of the European Union each member state’s vote is currently weighted
according to population size, with the UK having the third-highest population among EU
member states. Certain decisions still require unanimity to pass, namely in the areas of
taxation, social security or social protection, the accession of new states to the European
Union, foreign and common defence policy and operational police cooperation between the
member states. Unanimity offers some protection to the UK, but can also limit the UK’s
ability to achieve the change it wants if other member states oppose it, as they hold the
same power of veto as the UK.

10%

UK MEPs represent nearly a tenth of the European Parliament

The majority of today’s policy decisions, are therefore now made under Qualified Majority
Voting (QMV), where no country’s vote alone is enough to win or block a decision, to allow
the EU to remain responsive to challenges while respecting the broad consensus of member
state thought.

In the European Parliament, the formal voting power of MEPs takes a number of forms. At the
most basic level, all UK MEPs have an individual vote on EU legislation. MEPs are also
members of various political groupings in the Parliament, made up of collections of
different parties from across Europe, and they can vote to decide their group’s position in
advance of policy being decided. Influencing the larger groups from within can be crucial to
influencing the wider Parliament.

In the Commission, formal voting is less important. That said, during the initial drafting
of legislation to propose, all Commissioners have to agree on a proposal before it
progresses to the full legislative process. It is important that the UK’s Commissioner
exercises this right to vote, or works to shape a consensus so that a formal vote is not
needed.

However, the formal influence garnered through voting rights is by no means the ultimate
barometer of overall influence for an EU member state, for two main reasons. First, the
potential of voting to influence outcomes has changed over time through formal changes to
the Council voting process, including the shift from unanimity to an increasing number of
decisions being taken under QMV and, from November 2014, a new voting system which aims to
increase the ease of decision-making in Council. Furthermore, the rise in power of the
European Parliament through its increasing role in the policymaking process has reduced the
ability of member state governments to simply rely on their formal voting power in Council
to realise their aims.

Secondly, because consensus is preferred to putting policies to a straight vote, the nature
of the EU policy process means that using formal influence tools alone is rarely the best
way to further UK interests. Informal influence is therefore increasingly important.

The UK is effective at building alliances and rarely finds itself isolated

The UK is effective at building alliances when it engages positively and consistently. The
UK’s large voting weight allows it to act as an attractive anchor for alliances,
facilitating coalitions with a large member state at the base.

Britain has historically been closely aligned with other northern European countries – who
often share similar economic stances – in particular Finland, Ireland, Germany, Sweden,
Denmark, the Netherlands and the Baltic states. Far from the ’awkward partner‘ often
portrayed and despite not taking part in a number of areas of further integration such as
the single currency or Schengen Area, the UK has historically built alliances across the EU
to corral support for its position in areas right across the policy spectrum.

It has been argued that, by choosing to remain outside the Eurozone, the UK may struggle to
build alliances within the Council. However, in reality, the ‘opt-out’ countries appear to
perform on a par with the ‘in’ countries when it comes to forming alliances. It is important
to be seen as credible and co-operative – each participant has to be willing to find common
ground and acceptable solutions to concrete problems, often in the face of overarching
ideological disagreement – and the most powerful states, such as Germany and France, broadly
see the UK as such a partner.

"

Far from the ‘awkward partner’ often portrayed and despite not taking part in a
number of areas of further integration such as the single currency or Schengen Area,
the UK has historically built alliances across the EU to corral support for its position.

A survey of more than 600 member state representatives found that the UK, although outside
the Eurozone, is a powerful member state with high ‘network capital’, indicating that other
member states are keen to engage and co-operate with Britain. In the three years when the
survey was conducted, the UK had the highest network capital of all countries in the EU in
2009 and 2003, and it came second in 2006. Moreover, the UK is the preferred partner of the
most powerful member states and often functions as a key intermediary between countries.[7]

The UK has best realised its interests when it has built strong coalitions in Council to
robustly defend its interests during negotiations. For example, in response to suggested
amendments to the 1992 Directive on pregnant workers, the UK was able to block damaging
proposals during the negotiation phase by building an alliance with Germany and other member
states who also believed the proposals overstepped the boundaries of subsidiarity and would
increase costs for both companies and governments without solid evidence.

Again, on trade policy, the UK has recently been effective in building coalitions with
Germany, the Nordics and the Netherlands in cases when the European Commission has sought to
introduce proposals that restrict the EU’s market openness, including on public procurement
and mandatory origin marking.

These alliances are most influential in the build-up to a vote that will form a position,
whether internal or final, rather than at the technical specification phase when political
disagreements are likely to have already been overcome. However, effective coalitions at
even earlier stages, especially in more than one institution, can sometimes prevent an issue
becoming a concern even before a full proposal emerges, as was the case in the Commission’s
review of rules for pension funds (IORP), where a broad alliance put a halt to a capital
requirements regime unfit for the pension industry (see Exhibit 44).

The Commission began its work on a legislative proposal to review the existing 2003
IORP Directive for pension funds in 2010, and it became clear that the revision would
include higher capital requirements for occupational pension funds.

The UK government believed that the plans would damage long-term growth and destabilise markets. Increased
requirements would increase scheme liabilities, which in a British context could mean
additional costs for businesses of up to £450bn. Funding would be locked away in the
pension fund diverting it away from business investments and job creation. A CBI/Oxford
Economics report showed that business investment would be 5.2% lower than otherwise in
the mid-2020s, with a shortfall of 1.4% still being felt in 2040.
[8]

Moreover, the UK argued that pensions should be treated differently from other financial products as they
are deeply integrated into national social protection systems and regulated by national
social and labour laws, and generally backed by outside sources of solvency, such as the
sponsoring employer, contingent assets and the Pension Protection Fund (PPF).

The UK was able to build over time a broad alliance with countries such as Germany, the Netherlands
and Ireland. This led to changes to funding requirements being dropped from the scope of
the Commission’s work on this issue.

Building alliances helps the UK not only when it is looking to defend its interests but
also if it wants to set the big-picture agenda items that the Commission and Council focus
on in the longer term – whether to prioritise a free trade agenda or to cut red tape.
Setting the agenda is most likely when the UK has built a coalition of like-minded states
before the legislative phase even begins. For example, the ’Green Growth‘ group – driven in
large part by UK Secretary of State for Energy and Climate Change Ed Davey – brings together
14 ministers from across the EU to discuss positions among like-minded countries and to
build the public and political momentum necessary to influence EU energy and climate change
policies and legislation to the advantage of those states and the EU as a whole. This
government-to-government engagement can be replicated between national parliaments, to build
coalitions of parliamentarians that can push messages in their respective member states to
pressure their governments to take these messages to Brussels and into negotiations.

These coalitions – whether to set the agenda or see off potential threats to UK interests –
are stronger when they are built on broad-based alliances across all the EU institutions,
starting from a position of relative UK unity.

Creating a common position among domestic actors is vital to presenting a united
UK position in Europe that can be the foundation of strong pan-EU coalitions.
Having the UK government, UK MEPs, UK staff in the Commission (including the UK
Commissioner) and UK external actors such as business groups united behind a broadly common
position greatly increases the chance of then mapping this position on to the European
policy process. Using business federations or technical bodies can help member states
strengthen arguments that persuades other member states to enter alliances. For example, the
CBI’s report with Oxford Economics on the impact of strict prudential rules on pension funds
helped give rigorous underpinning to arguments against an overly strict regime that resulted
in a successful outcome on the legislation (see Exhibit 44).

Furthermore, powers granted in the Lisbon Treaty to national Parliaments also increase the
importance of involving domestically elected representatives in this process, so they can
then use their connections to build links with parliamentarians in other member states as
well as their own UK party’s MEPs (see Exhibit 45).

Exhibit 45: Building coalitions between national Parliaments can stop damaging legislation
in its tracks

National parliaments have the right to object to EU rules if they believe member states,
rather than the EU, would be better placed to solve the problem. If at least one-third of
all national parliaments together object to a proposal within eight weeks of publication,
the “Yellow Card” Procedure forces the Commission to review the proposal to decide whether
to maintain, amend or withdraw it.

The procedure was introduced with the Lisbon Treaty to counter the democratic deficit of
the EU and gives national parliaments the right to ensure that the EU does not regulate if
an issue is better dealt with at national level – the so-called ‘subsidiarity principle’. If
more than half of parliaments object, the proposal is sent to the Council and Parliament who
can reject it by giving it a ‘Red Card’.

In September 2012, this procedure was used successfully to object to ‘Monti II, a proposed
EU Regulation on the right to strike, when a coalition of 12 member states, including the UK
and the Netherlands, used the Yellow Card and forced the Commission to withdraw its
proposal.

Once a common UK position has been adopted, it is important to build coalitions right
across the EU institutions throughout all stages of the policy process. As described above,
the UK has historically been successful at building alliances in the Council, but it needs
to replicate this in the other institutions. The UK needs to work to build support for its
reactive positions in the Commission – at staff level and at Commissioner level – but also
for those issues where it wants the UK Commissioner to push issues proactively.

Building alliances in the European Parliament between MEPs of different member states must
also be a focus, and engaging at a political level to build alliances at political party and
grouping level is also an important influence channel. Unfortunately, the UK’s historical
success in building alliances in the Council has struggled to spill over into the
Parliament. The party political nature of the institution – as well as the current lack of
UK representation in the biggest political grouping, the European People’s Party – has
reduced UK influence here. The UK’s first ever defeat on a piece of substantive financial
services legislation is an example of this need to increase influence across institutions
and throughout the policy process: proposals regarding remuneration in the banking sector
hijacked a wider vote on the Capital Requirements Directive IV, seeing the UK outvoted for
the first time on financial services legislation after it had failed to build and maintain
alliances on the issue throughout the legislative process in both the Council and
the Parliament.[9]

Historically, proactive and positive engagement to craft consensus has led to successful
outcomes. The lack of prior diplomatic engagement which led to the December 2011 ‘veto’ was
not only ineffective in that the veto did not particularly influence the final outcome (the
bulk of policy behind the proposed Treaty for Stability and Growth went ahead), but it also
harmed British influence in day-to-day negotiations in Brussels, particularly on financial
services. In contrast, the UK’s positive coalition building led to a considerable ‘win’ for
the UK during EU budget negotiations 12 months later. The UK government is clearly most
influential when it is most engaged, and business supports a continuation of this positive
engagement.

Exhibit 46: UK coalition building to achieve an EU budget ‘win’

The EU budget negotiations for 2014-2020 highlight the UK’s ability to build alliances and
achieve clear ‘wins’ when it engages in the right way. Instead of finding itself isolated,
the UK managed to find agreement with other net contributors such as Germany, Sweden, and
the Netherlands that there had to be a real cut in overall EU funds in order to reflect
significant cost-saving measures that had been implemented at national level by member state
governments. In spite of opposition from some net beneficiaries from EU funding, the UK was
able to secure an outcome that resulted in a 3.5% reduction of the overall budget in real
terms (€960 million),[10] compared with the
Commission’s original proposal which called for a 4.8% increase (€1.025 trillion) on the
previous seven year period.[11]

The UK needs to do more to ensure that it has personnel in key positions to help frame the
EU debate

Having national citizens in prominent positions, both political and official, in EU
institutions is an important tool of informal influence.

Such personnel give a number of advantages. First, information that helps member states
stay up to date with policy developments that might impact on national interests often flows
from personnel posted to EU institutions. As former UK diplomat Sir Colin Budd told the
House of Commons Foreign Affairs Select Committee: “all EU member states rely significantly
on the nationals they have in the EU institutions as part of their collective networking
strength”. Secondly, it gives the UK a platform to set the agenda of the EU’s institutions.
This is true in the Commission, where the Commissioner (and his Cabinet and
Director-General) can help set the agenda, but it is also increasingly true in the
Parliament, as senior Parliamentarians in political groupings and as Chairs of key
Committees are more often taking a lead on policy promotion.

A third benefit of having personnel in the EU institutions is the influence it affords a
member state over the details of legislation. This is useful both during negotiation stages
– for example, by having Rapporteurs in the Parliament or desk officers and senior officials
in the Council/Commission – and when technical details are being finalised in technical
committees or agencies. Having influential people in the Commission who closely understand
the UK’s point of view – either by their nationality or by having heard persuasive
representations from UK actors – is crucial, especially during the drafting of legislation.

Politically, the potential for UK influence via the Parliament is considerable, especially
when one considers the power that rapporteurs or shadow-rapporteurs have to influence the
final text of legislation. For example, in the case of data protection, UK MEPs Timothy
Kirkhope (Conservative) and Baroness Ludford (Liberal Democrat) used their positions as
shadow rapporteurs in the Civil Liberties, Justice and Home Affairs (LIBE) Committee to
champion amendments alleviating the burdens on firms against the more stringent approach
taken by the main rapporteur on the data protection Directive.

There are also challenges in the European Parliament: the UK needs to look to improve the
attendance and voting record of its MEP representation, as some MEPs are currently failing
to exercise those formal rights they have been given to further British interests (see
Exhibit 47). British business is dependent on MEPs who work for the UK in
the increasingly powerful Parliament because their activity has a direct impact on the
day-to-day operations of companies by deciding issues like product rules, capital
requirements or labour market reform.

Exhibit 47: Attendance and activity in the European Parliament (2009 - October 2013)[12]

The UK has had a relatively strong presence in the staff of the European Commission for
many years, with UK nationals holding strategically valuable positions at a senior level
(see Exhibit 48). This strong representation over the past 20 years has allowed the UK to
hold the joint highest number of the most senior EU civil service positions in the
Commission, with five Directors-General currently in post (see Exhibit 48). However, in
terms of the Commissioners themselves, the present division of Commission portfolios among
member states does not favour the UK in terms of business priorities.

Exhibit 48: UK representation – influence across the EU

Jonathan Faull: Commission Director-General for the internal market and
services

Philip Lowe: Commission Director-General for Energy

Robert Madelin: Commission Director-General for Communications Networks,
Content and Technology

Historically, the UK has been relatively effective in using its representation in the staff
of EU institutions, most notably in the Commission. But the UK is in danger of a significant
reduction in its ability to use this channel of influence. In relation to its share of the
EU’s population, the UK is now significantly under-represented in terms of staffing levels
in the Commission and Parliament.[13] The lack of UK
staff in the Parliament is especially concerning given the increase in its formal powers and
political influence in recent years.

The number of UK nationals in the Commission staff has fallen by a quarter in seven years,
standing at a total of 4.6% of Commission staff, compared to the UK’s 12.5% share of the
EU’s population. In comparison, French nationals make up 9.7%. UK presence has also fallen
in the last three years in the secretariat of the Council and the European Parliament. The
UK has higher shares of senior positions than junior ones (a worrying ‘generation gap’) but
comes behind France in all categories. For instance, among junior positions in the
Parliament staff the UK had just a 2.1% share at the start of 2013 compared to France’s
17.4%, and at entry-level administrator grade in the Commission there were 14 member states
with more nationals than the UK.

"

Fixing the ‘generation gap’ that has opened up among UK staff in EU institutions is essential
to maintaining UK influence.

Given the importance of staff to framing the parameters of legislation, fixing this
’generation gap’ that has opened up at levels where early decisions are made about the
direction of legislation, and reversing the overall downward trend in UK representation, is
essential. The UK government’s EU Staffing Unit in the Foreign and Commonwealth Office
(FCO), established in April 2013, should be a helpful tool, working to place additional
seconded national experts in the short term and increase the number of permanent officials
in the longer term by promoting recruitment opportunities to students, graduates and
professionals. But Foreign Secretary William Hague could not have put it better when he said
that present staff numbers indicated a failure to “give due weight to the development of
British influence in the EU”, and the UK needs to address this deficiency.

-25%

The number of UK nationals in the Commission staff has fallen by a quarter since 2006

The UK’s technical expertise gives it significant credibility on a range of issues that
allow it to set the agenda

Although the direction of the policy agenda is dictated primarily by political forces, the
EU undoubtedly looks to those member states with expertise when deciding policy direction,
as well as specifics, in particular areas. This allows member states with key interests, and
often therefore the corresponding expertise, to better protect and further those interests.
This is especially true during the policy formulation stage, when establishing a fact-base
for a proposal necessitates engaging with experts and those with real-world experience of
the issue, but also during ongoing negotiations, when technical dexterity can often find a
way around political roadblocks.

"

The UK has historically used its expertise and the credibility of its citizens,
both as policymakers within institutions and as external contributors to the policy process,
as an important tool to influence the
direction of policy in the EU.

The UK has historically used its expertise and the credibility of its citizens, both as
policymakers within institutions and as external contributors to the policy process, as an
important tool to influence the direction of policy in the EU. For example, the UK’s
expertise in the area of financial services – based on London’s position as a global
financial centre and the Bank of England’s historic reputation as a regulator as well as
central bank – has given it significant influence on the direction and development of
financial services legislation, from the liberalisation of financial services under the
Irish Commissioner Charlie McCreevy at the end of the last decade to forming the EU’s
response to the recent financial crisis (see Exhibit 49).

The UK government put forward
their position on the ongoing review of the Markets in Financial Instruments
Directive in alliance with other member states, through fact sheets and
Q&A briefings to other member states about the operations of financial
markets and how to best regulate them. The UKs policymaking credibility
– both in the Treasury and the Bank of England – ensured that
these arguments were given prominence during debates in the EU on the
subject, and they allowed the UK to shape the Council position that would allow
financial markets to function better for the whole of the EU as well
reflecting the priorities of the City of London.

Once legislation reaches the technical specification phase, having expertise becomes
crucial: details are technical and it is difficult for political actors to follow the
process, so having expertise becomes the primary way to exert influence on the details that
can impact directly on business models. This is particularly true in areas with increasing
use of detailed legislation at EU level (see Exhibit 50). For example, the use of delegated
and implementing acts in Commission drafts for both the Network and Information Security
Directive (cyber security) and the General Data Protection Regulation have sparked fears
among industry that inappropriate calibration of final rules could hinder innovation. Having
UK expertise informing the development of these rules is therefore an important influence
tool to get the right result for business.

British expertise on digital and broadcasting issues allows the UK to influence the
policymaking process from the outset, during the setting of regulatory requirements, and
during the ongoing process of supervising and regulating the industry.

UK leadership in opening up government datasets and the appointment of a ‘digital
champion’ in Martha Lane Fox has seen calls from President Barroso and the Commissioner for
the Digital Agenda, Neelie Kroes, for other member states to do the same.

UK regulatory expertise during lobbying on the Audiovisual Media Services (AVMS)
Directive led to the incorporation of the ‘country of origin’ principle in the final
legislation, which means that content being disseminated throughout the EU need only comply
with the national rules where the broadcaster is based, rather than with rules in each of
the 28 member states. This allows the UK to be the leading commercial broadcasting hub in
Europe, with the regulation allowing firms broadcasting to any EU country to set up in the
UK without having to duplicate regulation.

The UK regulator, OFCOM, represents the UK in the Body of European Regulators of
Electronic Communications (BEREC), allowing it to use its expertise to help shape the
debates in the EU on all telecoms regulation and best practice. OFCOM also has a seat at the
table during European negotiations on spectrum allocation – an issue of prime importance to
the UK telecoms industry – working with the European Commission’s radio Spectrum Policy
Group and, on pan-European allocation, with the 48 country-strong European Conference of
Postal and Telecommunications Administrations.

Outside groups and individuals, including from the UK, can also influence the policy
process through credible intervention and by showing examples of best practice. The EU’s
policymaking and deliberative organisations are in constant demand for information as
resources are relatively scarce. EU officials therefore regularly call on a number of
external actors during the European public policy process, including national regulators and
the business community, and the UK’s credibility on a number of issues has historically
allowed it to increase its influence on the policy process (see Exhibit 51).

Exhibit 51: Examples of UK influence through best practice:

Credibility can also influence the EU process itself by driving improvements that benefit
business, particularly by offering best practice from member states:

Small business: The UK’s ’Small Firms Impact Test (SFIT)’ was cited
as an example of best practice that influenced the Commission’s decision that all Regulatory
Impact Assessments should include a specific evaluation of the impact on SMEs of the
proposal.

Internet regulation: The UK’s strong code of best practice worked
up between industry and the regulator (OFCOM) on a voluntary basis must be used to push the
Commission towards pursuing a similar approach on the issue of ‘net neutrality’ in the
EU.

Corporate governance: The UK often has more developed corporate
governance structures than other EU member states, setting the standard during EU attempts
to make progress on boosting corporate governance across the Union. For example, the Kay
review on short-termism in the UK has recently prompted recommendations in the Commission’s
Green Paper on Long Term Investment, while rules on non-financial reporting currently under
discussion mirror the ‘comply or explain’ approach used in the UK.

Impact Assessments (IA): The evaluation of the Commission’s IA
compares it to the British IA system, which itself has been referred to as the most advanced
in Europe and a benchmark for progress in the Commission’s own IA process: “the gap between
the UK and the Commission in terms of benefit quantification has disappeared” .[14] Indeed, the UK has been able to use this
credibility to open another tool of influence: one of the members of the current IA board is
Belinda Pyke, a UK national.

Although the UK is seeing its standing increasing in a number of areas, most notably on
climate change issues and in the area of telecoms, one of the biggest threats to UK
influence in the EU in this area comes from the reputational hit the UK took as a result of
the financial crisis. Some in Europe have pointed to the failure of the ‘Anglo-Saxon’ model
(as critics term it) as an indication that the UK can no longer be trusted on financial
services regulation. Regaining credibility in this area should be a key aim of the UK
government and financial services industry, as historic gains in this area have, in part,
been built on the European model for deferring authority to those who have credibility and
expertise in a particular area.

The UK’s role in a number of global institutions magnifies the international pressure it
can bring to bear in the EU

The final ‘tool of influence’ for the UK is the use of international forums that can shape
the strategic direction of policy debates. Global institutions can help set the parameters
of legislation at a European level in line with UK objectives, especially as the agenda is
increasingly being set at an international level to deliver responses to global challenges
(see Exhibit 52).

50%+

More than half the 47 pieces of EU financeial services legislation put forward
since 2009 directly reer to the EU's G20 commitments

The EU operates in a global environment and the priorities of third countries and
international institutions have an impact on the EU policy process. As an international
actor itself, the EU is informally influenced by discussions that occur at international
level on global issues, such as on global warming and tax transparency, as well as taking
part in formal international institutions such as the WTO that dictate the parameters within
which certain policies must operate.

In a globalised world, there is also an increasing impact on the EU’s day-to-day policy
process from international decisions, with a significant amount of EU regulation now
stemming from international agreements to which the EU and its member states are
signatories. The international response to the global financial crisis, and its subsequent
impact on EU and UK legislation, highlights this trend. Following the financial crisis, the
EU has driven forward comprehensive reform of the financial services regulatory framework. A
substantial part of these reforms are the translation of the commitments the EU has made in
the G20, as stated in the Commission’s description of the financial services reform: “The
G20 has been instrumental in establishing the core elements of a new global financial
regulatory framework that will make the financial system more resilient”. More than half of
the 47 pieces of legislation put forward in total since 2009 directly refer to the EU’s G20
commitments.

This international policy agenda is mirrored to some extent in trade policy: many EU rules
are ratifications of WTO agreements developed by WTO members, such as rules on public
procurement, while the recently agreed international Nagoya Protocol on biodiversity will
decide EU’s rules in this area. The UK can therefore use its influence in the various
international bodies – both political and technical –to ensure that the rules which filter
down to the EU from international institutions, and therefore which will eventually reach
the UK via the EU, are set in line with UK interests.

Exhibit 52: UK presence in international bodies is an important tool of influence
over EU policymaking

The Group of Eight (G8) is a forum for governments from
eight of the world’s largest economies – including the UK, Italy, Germany and France –
with leaders meeting once a year to discuss global issues. Not only is the EU
represented as a ‘ninth member’ (although it cannot host or chair summits), but G8
discussions often set the broad agenda for policy at EU level.

The Group ofTwenty (G20) gathers finance ministers, central bank governors and heads of government
or heads of state from 20 major economies and the EU as well as several member states –
UK, Germany, France and Italy – have a seat at the table. The body discusses global
economic and financial issues, and its conclusions commit the G20 countries to undertake
reform with the aim of reaching greater global coherence. The UK’s direct access gives
it a unique opportunity to shape international rules which then set the agenda for
European rules.

The Financial Stability Board (FSB) oversees implementation of
many of the G20 commitments on financial regulation. It co-ordinates the work of
national financial authorities at an international level and develops and promotes the
implementation of effective regulatory, supervisory and other financial sector policies.
The UK has a broad representation in this institution, and the current Governor of the
Bank of England, Mark Carney, is its chair.

The United Nations (UN) is an intergovernmental organisation that aims to promote and facilitate international
co-operation across a range of fields, from security issues through international law to
progress on human rights and democracy. The UK is a voting member of the UN and holds a
permanent seat on the Security Council (along with France, the only other EU member
state represented).

The Organisation for Economic Co-operation and Development
(OECD) is an influential organisation, particularly on issues such as tax and structural
reform, and it gathers 34 countries including the EU and 21 of its member states. The UK
is a direct member. The members meet in specialised committees and there are about 200
on specific policy areas, such as economics, trade, science, employment, education and
financial markets.

The World Trade Organization (WTO) deals with the global
rules of trade between nations and facilitates interaction between member governments on
trade issues, including negotiating trade liberalisation agreements and settling trade
disputes. The UK is a member of the WTO and has signed up independently. However, the EU
negotiates on behalf of all its member states.

The UK is influential in these international bodies partly by virtue of being a large
economy in its own right but also because it is seen as influential in the wider EU. In a
bi-causal relationship, the UK can influence international bodies – which in turn can
influence the EU to UK advantage – precisely because the other actors in those bodies
believe that the UK can influence the direction of the 500 million-strong EU bloc in the
first instance. Therefore there is a danger that the UK’s ability to persuade international
actors to bring pressure to bear on the EU could be diminished if the international
community perceives the UK to be abrogating its leadership role in Europe.

4.3 The UK is influential in the EU, but the UK approach itself is the key to
success

The UK has been influential in shaping the EU to maximise the aspects of openness that
underpin the UK’s global trading role. It has considerable voting power, is effective at
building alliances, has key personnel in EU institutions, and is an acknowledged thought
leader in a number of areas. It also uses its membership of international bodies such as the
G20 to further influence the EU in a top-down approach.

"

The UK has large voting power, is effective at building alliances, has key personnel
in EU institutions, and is an acknowledged thought leader in a number of areas.
It now needs to work to maximise this influence.

There are, however, signs that the UK is not maximising its potential to influence EU
outcomes. The UK government must continue to proactively build alliances to achieve its aims
across the EU institutions and in other member states. The fallout from the use of the veto
in December 2011 has meant that the UK must redouble its efforts to proactively win support.
Similarly, the UK must work to reverse the decline in numbers of UK staff employed in the
Commission and Parliament, and attempt to rebuild its reputation as a source of expertise on
financial services issues.

UK influence will matter more than ever in the coming period, as the further integration of
the Eurozone potentially changes the nature of the EU. The UK must navigate a course that
ensures it shapes the EU to preserve the advantages of membership felt by British business.
The likely scenario for the development of the EU and the Eurozone are explored in Chapter
5.

[8] Oxford Economics, The economic impact for
the EU of a Solvency II inspired funding regime for pension funds, 2012

[9] House of Commons Foreign Affairs Committee, The
future of the European Union: UK Government policy, May 2013

[10] Council of the European Union, Summary of the
European Council agreement on the multiannual financial framework (MFF) negotiations,
accessed on 23 October 2013, available at:
consilium.europa.eu

[11] European Commission, Proposal for a Council
Regulation laying down the multiannual financial framework for the years 2014-2020, June
2011, available at: ec.europa.eu

[12] VoteWatch. Voting records 2009 – October
2013. Date does not take into account that a number of MEPs have arrived in the interim
and consequently have shorter voting records for analysis.

[13] Against its 12.5% share of the EU population, the
UK now fields 4.6% of Commission staff, 5.8% administrator-grade staff in the
European Parliament and 4.3% of administrator-grade staff in the General
Secretariat of the Council of the EU. House of Commons Foreign Affairs Select Committee, The UK
staff presence in the EU institutions, 2013.

[14] Oliver Fritsch, Claudio M. Radaelli, Lorna
Schrefler & Andrea Renda, ‘Regulatory Quality in the European Commission and the UK:
Old questions and new findings’, 2012